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Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-04 · 174 added, 85 removed, 130 unchanged (67% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands except per share data)

Biglari Holdings Inc.

is a holding company owning subsidiaries engaged in a number of diverse business activities, including property and casualty insurance, licensing and media, restaurants, and oil and gas.

Biglari Holdings is founded and led by Sardar Biglari, Chairman and Chief Executive Officer of the Company.

Biglari Holdings’ management system combines decentralized operations with centralized financial decision-making.

Operating decisions for the various business units are made by their respective managers.

All major investment and capital allocation decisions are made for the Company and its subsidiaries by Mr.

As of March 31, 2023, Mr.

Biglari beneficially owns shares of the Company that represent approximately 66.3% of the economic interest and 70.4% of the voting interest.

On September 14, 2022, the Company purchased Series A Preferred Stock (the “Preferred Shares”) of Abraxas Petroleum Corporation for a purchase price of $80 million.

On October 26, 2022, the Company exchanged the Preferred Shares for 90% of the outstanding common stock of Abraxas Petroleum.

Net earnings (loss) attributable to Biglari Holdings Inc.

shareholders are disaggregated in the table that follows.

Amounts are recorded after deducting income taxes.

First Quarter

Operating businesses:

Restaurant $ 5,840 $ 3,262

Insurance 2,169 1,044

Oil and gas 1,670 2,924

Brand licensing 91 (251)

Interest expense (129) —

Corporate and other (2,998) (2,651)

Total operating businesses 6,643 4,328

Investment partnership gains (losses) 56,029 (4,801)

Investment gains 2,865 175

Net earnings (loss) 65,537 (298)

Earnings attributable to noncontrolling interest 651 —

Net earnings (loss) attributable to Biglari Holdings Inc.

shareholders $ 64,886 $ (298)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Franchise partner fees were $15,880 during the third quarter of 2022, as compared to $11,508 during the third quarter of 2021.

Franchise partner fees were $47,929 and $31,744 during the first nine months of 2022 and 2021, respectively.

As of September 30, 2022, there were 171 franchise partner units, compared to 140 franchise partner units as of September 30, 2021.

For a franchise partner to be awarded a restaurant, he or she must demonstrate the gold standard in service.

The franchise royalties and fees generated by the traditional franchising business were $5,089 during the third quarter of 2022, as compared to $4,865 during the third quarter of 2021.

Franchise royalties and fees during the first nine months of 2022 were $15,472 compared to $14,594 during the first nine months of 2021.

The cost of food as a percentage of net sales during the third quarter and first nine months of 2022 was 30.3% and 29.7%, respectively, as compared to 31.3% and 29.7% of net sales during the third quarter and first nine months of 2021, respectively.

Cost of food as a percentage of net sales were lower during the third quarter of 2022 compared to 2021 primarily because of higher menu prices.

Restaurant operating costs as a percentage of net sales during the third quarter of 2022 were 55.4%, as compared to 58.4% of net sales in the third quarter of 2021.

Restaurant operating costs during the first nine months of 2022 were 53.9% of net sales, as compared to 49.1% of net sales in 2021.

The increase during the first nine months was primarily the result of higher wages.

Selling, general and administrative costs during the third quarter and first nine months of 2022 were $11,489 and $36,775, respectively, compared to $12,889 and $39,894 in the third quarter and first nine months of 2021, respectively.

Steak n Shake recorded gains on the disposal of assets of $1,084 and $1,749 in the third quarter and first nine months of 2022, respectively.

The Company recorded no impairment charges in the third quarter and $20 in the first nine months of 2022.

The Company recorded no impairment charges in the third quarter and $559 in the first nine months of 2021, respectively.

Impairments during 2021 are related to underperforming stores.

Our restaurant businesses, which include Steak n Shake and Western Sizzlin, comprise 532 company-operated and franchise restaurants as of March 31, 2023.

Steak n Shake Western Sizzlin

operated Franchise

Partner Traditional

Franchise Company-

operated Franchise Total

Total stores as of December 31, 2022

177 175 154 3 36 545

Corporate stores transitioned (3) 3 — — — —

Net restaurants opened (closed) (2) — (11) — — (13)

Total stores as of March 31, 2023

172 178 143 3 36 532

Total stores as of December 31, 2021

199 159 178 3 38 577

Corporate stores transitioned (12) 12 — — — —

Net restaurants opened (closed) (3) — 1 — — (2)

Total stores as of March 31, 2022

184 171 179 3 38 575

As of March 31, 2023, 36 of the 172 company-operated Steak n Shake stores were closed.

Steak n Shake has contracted to sell seven of the 36 closed stores.

An additional seventeen closed stores are listed with brokers for lease or sale.

Steak n Shake plans to refranchise the remaining closed company-operated restaurants.

During the first quarter of 2023, Steak n Shake reopened two stores and sold one property;

all were closed as of December 31, 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Restaurant operations are summarized below.

First Quarter

Net sales $ 36,894 $ 38,216

Franchise partner fees 17,912 15,624

Franchise royalties and fees 4,258 5,146

Other revenue 2,065 861

Total revenue 61,129 59,847

Restaurant cost of sales

Cost of food 10,448 28.3 % 10,960 28.7 %

Restaurant operating costs 18,457 50.0 % 20,032 52.4 %

Occupancy costs 3,833 10.4 % 4,360 11.4 %

Total cost of sales 32,738 35,352

Selling, general and administrative

General and administrative 10,463 17.1 % 8,650 14.5 %

Marketing 2,953 4.8 % 3,744 6.3 %

Other expenses (income) (1,612) (2.6) % 45 0.1 %

Total selling, general and administrative 11,804 19.3 % 12,439 20.8 %

Impairments (776) —

Depreciation and amortization (6,707) (6,214)

Interest on finance leases and obligations (1,307) (1,412)

Earnings (loss) before income taxes 7,797 4,430

Income tax expense (benefit) 1,957 1,168

Contribution to net earnings $ 5,840 $ 3,262

Cost of food, restaurant operating costs, and occupancy costs are expressed as a percentage of net sales.

General and administrative, marketing and other expenses are expressed as a percentage of total revenue.

Net sales for 2023 were $36,894, representing a decrease of $1,322 or 3.5% compared to 2022.

The decrease in revenue of company-owned restaurants is primarily due to the shift of company units to franchise partner units.

For company-operated units, sales to the end customer are recorded as revenue generated by the Company, but for franchise partner units, only our share of the restaurant’s profits, along with certain fees, are recorded as revenue.

Because we derive most of our revenue from our share of the profits, revenue will continue to decline as we transition from company-operated units to franchise partner units.

Our franchise partner fees were $17,912 during the first quarter of 2023, as compared to $15,624 during the first quarter of 2022.

As of March 31, 2023, there were 178 franchise partner units, compared to 171 franchise partner units as of March 31, 2022.

Included in franchise partner fees were $5,575 and $4,774 of rental income during the first quarter of 2023 and 2022, respectively.

Franchise partners rent buildings and equipment from Steak n Shake.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The franchise royalties and fees generated by the traditional franchising business were $4,258 during the first quarter of 2023, as compared to $5,146 during the first quarter of 2022.

The decrease in franchise royalties and fees was primarily because of reduced marketing by franchisees.

There were 143 Steak n Shake traditional units open on March 31, 2023, as compared to 179 units open on March 31, 2022.

The cost of food at company-operated units during the first quarter of 2023 was $10,448 or 28.3% of net sales, as compared to $10,960 or 28.7% of net sales during the first quarter of 2022.

The cost of food expressed as a percentage of net sales remained relatively consistent.

The operating costs at company-operated restaurants during the first quarter of 2023 were $18,457 or 50.0% of net sales, as compared to $20,032 or 52.4% of net sales during the first quarter of 2022.

The decrease in operating costs as a percentage of net sales was mainly attributable to lower labor costs.

General and administrative expenses during the first quarter of 2023 were $10,463 or 17.1% of total revenue, as compared to $8,650 or 14.5% of total revenue during the first quarter of 2022.

The increase in general and administrative expenses was mainly attributable to increased support for franchise partnerships.

Marketing expense decreased by $791 during the first quarter of 2023 compared to the first quarter of 2022.

The decrease was primarily attributable to reduced marketing by traditional franchisees.

During the first quarter of 2023, Steak n Shake sold the property of a former company-operated restaurant for a gain of $1,431.

The Company recorded impairment charges of $776 in the first quarter of 2023 related to underperforming stores.

There were no impairments in the first quarter of 2022.

Depreciation and amortization expense was $6,707 during 2023 versus $6,214 during 2022.

The year-over-year increase is primarily attributable to higher capital expenditures incurred in 2022 and 2021.

Interest on obligations under leases was $1,307 during 2023 versus $1,412 during 2022.

The year-over-year decrease in interest expense is primarily attributable to the maturity and retirement of lease obligations.

We view our insurance businesses as possessing two activities:

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Underwriting results of our insurance operations are summarized below.

Third Quarter First Nine Months

2022 2021 2022 2021

Underwriting gain (loss) attributable to:

First Quarter

Underwriting gain attributable to:

First Guard $ 1,862 $ 732

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Earnings of our insurance operations are summarized below.

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

Premiums earned $ 14,764 $ 14,169

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Income tax expense 618 320

Contribution to net earnings (loss) $ 2,389 $ 2,985 $ 5,292 $ 8,902

Contribution to net earnings $ 2,169 $ 1,044

Insurance premiums and other on the consolidated statement of earnings includes premiums earned, investment income, other income, and commissions.

3 unchanged sentences

A summary of First Guard’s underwriting results follows.

Third Quarter First Nine Months

2022 2021 2022 2021

Amount % Amount % Amount % Amount %

First Quarter

Amount % Amount %

Premiums earned $ 8,899 100.0 % $ 8,731 100.0 %

2 unchanged sentences

Total losses and expenses 7,037 79.0 % 7,999 91.6 %

Pre-tax underwriting gain $ 2,354 $ 2,832 $ 4,800 $ 7,922

Pretax underwriting gain $ 1,862 $ 732

First Guard’s ratio of losses and loss adjustment expenses to premiums earned was 58.9% during the first quarter of 2023 as compared to 70.9% during the first quarter of 2022.

First Guard’s underwriting results in 2023 were in line with its historical performance despite cost inflation in property and physical damage claims, which began to accelerate in 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Southern Pioneer

1 unchanged sentence

A summary of Southern Pioneer’s underwriting results follows.

Third Quarter First Nine Months

2022 2021 2022 2021

Amount % Amount % Amount % Amount %

First Quarter

Amount % Amount %

Premiums earned $ 5,865 100.0 % $ 5,438 100.0 %

2 unchanged sentences

Total losses and expenses 5,976 101.9 % 5,775 106.2 %

Pre-tax underwriting gain (loss) $ (483) $ 397 $ (1,101) $ 1,511

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Insurance - Investment Income

Pretax underwriting gain (loss) $ (111) $ (337)

Southern Pioneer’s ratio of losses and loss adjustment expenses to premiums earned was 57.2% during the first quarter of 2023 as compared to 62.5% during the first quarter of 2022.

Southern Pioneer’s underwriting losses were primarily attributable to a higher expense ratio, an increase caused by information technology projects related to the implementation of a new policy administration system.

A summary of net investment income attributable to our insurance operations follows.

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

Interest, dividends and other investment income:

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However, we consider investment gains and losses, whether realized or unrealized, as non-operating.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

A summary of revenues and earnings of our oil and gas operations follows.

First Quarter

Oil and gas revenues $ 12,223 $ 9,812

Oil and gas production costs 5,471 3,819

Depreciation, depletion and accretion 2,850 1,519

General and administrative expenses 1,799 553

Earnings before income taxes 2,103 3,921

Income tax expense 433 997

Contribution to net earnings $ 1,670 $ 2,924

Our oil and gas business is highly dependent on oil and natural gas prices.

The average West Texas Intermediate price per barrel for the first quarter of 2023 was approximately $76.11 as compared to approximately $94.82 in the first quarter of 2022.

It is expected that the prices of oil and gas commodities will remain volatile, which will be reflected in our financial results.

Southern Oil primarily operates oil and natural gas properties offshore in the shallow waters of the Gulf of Mexico.

Earnings for Southern Oil are summarized below.

Third Quarter First Nine Months

2022 2021 2022 2021

Oil and gas revenue $ 12,688 $ 7,353 $ 36,940 $ 24,310

First Quarter

Oil and gas revenues $ 4,971 $ 9,812

Oil and gas production costs 2,340 3,819

4 unchanged sentences

Contribution to net earnings $ 739 $ 2,924

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Abraxas Petroleum

Abraxas Petroleum operates oil and gas properties in the Permian Basin.

Earnings for Abraxas Petroleum from the date of acquisition on September 14, 2022 are summarized below.

Third Quarter

Oil and gas revenue $ 1,692

Abraxas Petroleum operates oil and gas properties in the Permian Basin of West Texas.

Earnings for Abraxas Petroleum are summarized below.

First Quarter

Oil and gas revenues $ 7,252

Oil and gas production costs 3,131

4 unchanged sentences

Contribution to net earnings $ 931

Earnings attributable to noncontrolling interests 34

Net earnings attributable to Biglari Holdings Inc.

shareholders $ 309

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Brand Licensing

1 unchanged sentence

Earnings of operations are summarized below.

Third Quarter First Nine Months

2022 2021 2022 2021

Licensing and media revenue $ 1,905 $ 863 $ 3,788 $ 2,695

First Quarter

Licensing and media revenues $ 595 $ 634

Licensing and media costs 452 953

General and administrative expenses 21 17

Earnings (loss) before income taxes 1,534 (56) 1,699 867

Earnings before income taxes 122 (336)

Income tax expense (benefit) 31 (85)

Contribution to net earnings (loss) $ 1,150 $ (43) $ 1,274 $ 662

Contribution to net earnings $ 91 $ (251)

We acquired Maxim with the idea of transforming its business model.

The magazine developed the Maxim brand, a franchise we are utilizing to generate nonmagazine revenue, notably through licensing, a cash-generating business related to consumer products, services, and events.

Investment Gains

Investment losses net of tax for the third quarter of 2022 were $657 compared to investment gains net of tax for the third quarter of 2021 of $3,390.

Investment losses net of tax for the first nine months of 2022 were $3,287 compared to investment gains net of tax for the first nine months of 2021 of $4,896.

Investment Gains and Investment Partnership Gains

Investment gains net of tax for the first quarter of 2023 and 2022 were $2,865 and $175, respectively.

Dividends earned on investments are reported as investment income by our insurance companies.

1 unchanged sentence

However, we consider investment gains and losses, whether realized or unrealized, as non-operating.

Investment Partnership Gains

Earnings (loss) from our investments in partnerships are summarized below.

Third Quarter First Nine Months

2022 2021 2022 2021

First Quarter

Investment partnership gains (losses) $ 72,588 $ (6,661)

Tax expense (benefit) 16,559 (1,860)

Contribution to net earnings (loss) $ 23,057 $ (15,285) $ (62,091) $ 21,169

Contribution to net earnings $ 56,029 $ (4,801)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Investment partnership gains include gains/losses from changes in market values of underlying investments and dividends earned by the partnerships.

4 unchanged sentences

Gains and losses on Company common stock included in the earnings of the partnerships are eliminated in the Company’s consolidated financial results.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Investment gains and losses in 2023 and 2022 were mainly derived from our investments in equity securities and included unrealized gains and losses from market price changes during the period.

We believe that investment and derivative gains/losses are generally meaningless for analytical purposes in understanding our reported quarterly and annual results.

Interest Expense

The Company’s interest expense is summarized below.

Third Quarter First Nine Months

2022 2021 2022 2021

Interest expense on notes payable $ 67 $ — $ 67 $ 1,121

First Quarter

Interest expense on line of credit $ 167 $ —

Tax benefit 38 —

Interest expense net of tax $ 129 $ —

On September 13, 2022, Biglari Holdings entered into a line of credit in an aggregate principal amount of up to $30,000.

The balance of the line of credit was $6,500 and $10,000 on March 31, 2023 and December 31, 2022, respectively.

Our interest rate was 7.3% on March 31, 2023.

Corporate and Other

Corporate expenses exclude the activities of the restaurant, insurance, brand licensing, and oil and gas businesses.

Corporate and other net losses during the third quarter and first nine months of 2022 were relatively flat compared to the same period in 2021.

Income tax expense for the third quarter of 2022 was $9,598 compared to an income tax benefit of $4,274 for the third quarter of 2021.

Income tax benefit for the first nine months of 2022 was $13,282 compared to an income tax expense of $11,544 for the first nine months of 2021.

Corporate and other net losses during the first quarter of 2023 were relatively consistent to the same period during 2022.

Income tax expense for the first quarter of 2023 was $19,738 compared to an income tax benefit of $171 for the first quarter of 2022.

The variance in income taxes between 2023 and 2022 is attributable to taxes on income generated by the investment partnerships.

Investment partnership pre-tax gains were $29,658 during the third quarter of 2022 compared to pre-tax losses of $20,231 during the third quarter of 2021.

Investment partnership pre-tax losses were $82,244 during the first nine months of 2022 compared to pre-tax gains of $27,344 during the first nine months of 2021.

Investment partnership pretax gains were $72,588 during the first quarter of 2023 compared to pretax losses of $6,661 during the first quarter of 2022.

Financial Condition

Consolidated cash and investments are summarized below.

September 30,

2022 December 31,

March 31, 2023 December 31,

Cash and cash equivalents $ 39,363 $ 37,467

8 unchanged sentences

Consolidated cash flow activities are summarized below.

First Nine Months

First Quarter

Net cash provided by operating activities $ 19,923 $ 21,092

Net cash used in investing activities (12,735) (16,077)

Net cash provided by (used in) financing activities 25,353 (154,586)

Net cash used in financing activities (5,050) (1,564)

Effect of exchange rate changes on cash 8 (23)

Increase in cash, cash equivalents and restricted cash $ 2,146 $ 3,428

Cash provided by operating activities was $99,754 during 2022 compared to $211,245 in 2021.

The decrease in cash provided by operating activities is mainly attributable to distributions from investment partnerships of $51,200 f or 2022 and $172,420 for 2021.

The distributions during 2021 were primarily used to repay Steak n Shake’s debt.

Cash used in investing activities during 2022 was $102,464 compared to $55,782 in 2021.

Capital expenditures were lower during 2022 by $23,049 compared to 2021.

Steak n Shake incurred higher capital expenditures during 2021 for its transition to a self-service model.

Cash provided by financing activities was $25,353 in 2022 compared to $154,586 used in 2021.

The Company repaid Steak n Shake’s debt during 2021.

The increase in cash during 2023 was $2,146 compared to $3,428 during 2022.

We intend to meet the working capital needs of our operating subsidiaries principally through anticipated cash flows generated from operations and cash on hand.

4 unchanged sentences

The line of credit includes customary covenants, as well as financial maintenance covenants.

As of September 30, 2022, we were in compliance with all covenants.

The balance of the line of credit on September 30, 2022 was $30,000.

Steak n Shake Credit Facility

On March 19, 2014, Steak n Shake and its subsidiaries entered into a credit agreement which provided for a senior secured term loan facility in an aggregate principal amount of $220,000.

The term loan was scheduled to mature on March 19, 2021.

The Company repaid the balance of Steak n Shake’s term facility on February 19, 2021.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The balance on the line of credit on March 31, 2023 was $6,500.

The line of credit was paid in full in April 2023.

Western Sizzlin Revolver

Western Sizzlin’s available line of credit is $500.

As of March 31, 2023, Western Sizzlin had no debt outstanding on its revolver.

Critical Accounting Policies

6 unchanged sentences

No recently issued accounting pronouncements were applicable for this Quarterly Report on Form 10-Q.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cautionary Note Regarding Forward-Looking Statements

7 unchanged sentences

We undertake no obligation to publicly update or revise them, except as may be required by law.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis